Case Problem 2     DISTRIBUTION SYSTEM DESIGN

The Darby Company manufactures and distributes meters used to measure electric power consumption. The company started with a small production plant in El Paso and gradually built a customer base throughout Texas. A distribution center was established in Fort

TABLE 6.10 SHIPPING COST PER UNIT FROM PRODUCTION PLANTS TO DISTRIBUTION CENTERS (IN $)

Worth, Texas, and later, as business expanded, a second distribution center was established in Santa Fe, New Mexico.

The El Paso plant was expanded when the company began marketing its meters in Ari- zona, California, Nevada, and Utah. With the growth of the West Coast business, the Darby Company opened a third distribution center in Las Vegas and just two years ago opened a second production plant in San Bernardino, California.

Manufacturing costs differ between the company's production plants. The cost of each meter produced at the El Paso plant is $10.50. The San Bernardino plant utilizes newer and more efficient equipment; as a result, manufacturing costs are $0.50 per meter less than at the El Paso plant.

Due to the company's rapid growth, not much attention had been paid to the efficiency of the distribution system, but Darby's management decided that it is time to address this issue. The cost of shipping a meter from each of the two plants to each of the three distri- bution centers is shown in Table 6.10.

The quarterly production capacity is 30,000 meters at the older El Paso plant and 20,000 meters at the San Bernardino plant. Note that no shipments are allowed from the San Bernardino plant to the Fort Worth distribution center.

The company serves nine customer zones from the three distribution centers. The forecast of the number of meters needed in each customer zone for the next quarter is shown in Table 6.11.

The cost per unit of shipping from each distribution center to each customer zone is given in Table 6.12; note that some distribution centers cannot serve certain customer zones. In the current distribution system, demand at the Dallas, San Antonio, Wichita, and Kansas City customer zones is satisfied by shipments from the Fort Worth distribution cen- ter. In a similar manner, the Denver, Salt Lake City, and Phoenix customer zones are served by the Santa Fe distribution center, and the Los Angeles and San Diego customer zones are served by the Las Vegas distribution center. To determine how many units to ship from each plant, the quarterly customer demand forecasts are aggregated at the distribution centers, and a transportation model is used to minimize the cost of shipping from the production plants to the distribution centers.

TABLE  6.11 QUARTERLY DEMAND FORECAST

TABLE6.12     SHIPPING COST FROM THE DISTRIBUTION CENTERS TO THE CUSTOMER ZONES

Managerial Report

You are asked to make recommendations for improving the distribution system. Your report should address, but not be limited to, the following issues:

1. If the company does not change its current distribution strategy, what will its distribution costs be for the following quarter?

2. Suppose that the company is willing to consider dropping the distribution center limitations; that is, customers could be served by any of the distribution centers for which costs are available. Can costs be reduced? By how much?

3. The company wants to explore the possibility of satisfying some of the customer demand directly from the production plants. In particular, the shipping cost is $0.30 per unit from San Bernardino to Los Angeles and $0.70 from San Bernardino to San Diego. The cost for direct shipments from El Paso to San Antonio is $3.50 per unit. Can distribution costs be further reduced by considering these direct plant-to-customer shipments?

4. Over the next five years, Darby is anticipating moderate growth (5000 meters) to the North and West. Would you recommend that they consider plant expansion at this time?